The rapid growth of a number of consolidators over that period is testament to that drive. But recent data suggests the pool of M&A targets is now significantly smaller than in 2015 – and that could spell the start of the endgame for the roll-up model.
Rapid consolidation
A number of UK consolidators have demonstrated stellar growth through M&A in the past five years.
Ardonagh, for instance, grew Ebitda from £110mn in 2018 to £183mn in full-year 2019 before putting up nine-month Ebitda of £165mn, pointing to fresh growth in full-year 2020 – all coming from the nadir of Towergate’s near failure. And the business is believed to have a major pipeline of pending deals.
From a standing start in 2015, PIB has grown to £175mn ($239.5mn) revenues this year through more than 30 acquisitions, and in January secured investment from Apax Partners.
Similarly, Global Risk Partners (GRP) will hit £1.6bn ($2.23bn) in premium handled once its acquisition of Marsh’s UK Networks closes, up from £150mn in 2015.
Enduring attraction
The consolidation model makes sense in broking. Many businesses are similar enough to allow significant synergies if brought together, creating significant economies of scale.
Further, fee-based businesses such as brokers throw off regular, annuity-style revenues and strong cashflows, which allows intermediaries to service the debt they need to execute ambitious M&A strategies. Debt which has been cheap and readily available for many years now.
Although it has been slower to gain the ascendancy in the UK than the US – due in part to Towergate’s near collapse – the PE-owned roll-up model has now firmly established itself.
Broking businesses have also successfully demonstrated resilience during the Covid-19 pandemic. Despite a hiatus in M&A deals during Q2 last year, investor interest in the sector has remained and valuations have held fast.
This is partly because brokers did exceptionally well at managing to maintain or improve their margins during the pandemic despite revenue headwinds, as they cut operational costs, halted capital projects, and benefited from reduced travel and entertainment expenses during the lockdown.
While full financials are not available for most of the businesses in question, the performance of the US public brokers over 2020 serves as a useful proxy. Most of the public brokers were able to deliver 150-600 basis points of margin expansion during Q2 and Q3 when they squeezed spending hard.
With this hard work behind them, brokers are now in a good position to benefit as exposures rebound later this year during an environment with significant rate hardening.
The combination of rapid M&A-driven growth with economic resilience is enticing to PE and other institutional investors, creating a pool of hungry capital with the depth to allow even major investments to be recycled – such as Penta Capital’s sale of GRP to Searchlight, or Carlyle’s passing on of PIB to Apax.
Entering the endgame
The party cannot, however, go on forever. The market is reaching a stage where – to turn the old dating maxim on its head – there are not plenty more fish in the sea. And that signals the beginning of the endgame for UK-focused consolidation plays.
Data from advisory firm IMAS shows that the total number of UK insurance distribution businesses in 2020 stood at 2,400, down from 2,862. If the current pace of consolidation continues over the next five years, that number will fall to 1,918.
However, when stripping out businesses with fewer than 20 staff that were valued at less than £5mn or more than £100mn, and were focused in areas of interest to the majority of the consolidation platforms, IMAS estimated that in 2020 only 296 businesses remained – and that figure will fall to 151 in five years’ time.
IMAS broke down the intermediaries in scope for consolidators into corporate brokers – including 10 consolidators themselves – of which it counted 107.
To this it added 42 commercial specialty brokers (those with a narrow focus on a single line or industry), 21 motor fleet and transport businesses, and 22 warranty and legal brokers.
IMAS added that consolidators may also consider Lloyd’s brokers (47), MGAs with more than 20 staff (34), and high-net-worth (8) and niche personal lines (21) brokers in their strategies, but with second order importance relative to the first cohort of businesses.
This doesn’t mean that UK in-market consolidation is over, only that it is set to become more difficult over the medium term.
There is a deep irony around making this statement at present given that pending changes to the tax code mean that deal activity has reached an all-time fever pitch, with entrepreneurs desperate to get ahead of adverse changes on capital gains tax.
Looking further afield
The initial steps of consolidator vehicles into international expansion demonstrate how this prospective scarcity in the UK is already beginning to drive decision-making.
In September 2019, Acrisure agreed to buy Dutch intermediary Raetsheren, at which point Acrisure Re chairman Grahame Millwater revealed the company’s focus on Continental European opportunities rather than focusing on the UK.
PIB, meanwhile, last year bought the German firm Marx Re-Insurance Brokers and Polish intermediary WDB as CEO Brendan McManus confirmed the company would look to Europe to expand.
Ardonagh also made a potentially highly significant move earlier last month when it acquired Resilium in a deal that re-unites CEO David Ross with his former Gallagher colleague Paul Lynam. The acquisition looks like a beachhead for the roll-out of an ambitious M&A strategy in Australia, underscoring the international ambitions of the UK’s biggest consolidator.
Aston Lark has also bought two Irish businesses, Wright and Protean, as it looks to originate deals in adjacent markets.
Meanwhile, US retailer AssuredPartners has followed the same strategic imperative around unlocking new pools of acquirable businesses by pursuing a string of acquisitions in the UK.
Clearly, as the pool of opportunities in home markets dwindle, consolidators hungry for growth feel the need to cast the net more widely for targets.
Of course, when businesses move outside a home market and look abroad for targets, the challenges around both deal execution and integration grow. There is just more that can go wrong.
Buying businesses in different jurisdictions may also limit the benefits available from scale, with some need for duplication of back-office staff in different geographies.
The next challenge
We certainly haven’t reached the point where the game is up for acquiring £5mn-£100mn, but it is becoming clearer that that is on the horizon, and it will mean that the M&A landscape shapes up differently over the next five to 10 years than in the last five.
Once the smaller fish are thinned out, it may be time for the larger predators to begin pairing up to deliver continued platform growth.
It is easy to see a scenario where two platforms look for growth via a merger, with scope for merger-of-equals deals to emerge as well as potentially takeovers.
This endgame may not deliver returns to equal those of the earlier roll-up phase. For one thing, the consolidator model derives value from two elements: the inwards-outwards multiple arbitrage that has emerged, and the synergies unlocked via the consolidation.
When two large platforms merge – or one platform sells to another – only the synergies factor remains because both would carry a premium “platform” valuation. (For more detail on how the model works, see here.)
There are also social issues to consider. Consolidator vehicles are by necessity led by driven, individualistic, entrepreneurial characters – and no platform needs two CEOs. This may present a barrier to successfully striking a merger deal unless one CEO is looking to genuinely bow out and retire.
The next phase in this cycle of consolidation is fast approaching, and large platforms will already be considering whether the best play is to seek out new opportunities further afield or look for a transformative merger with a peer.
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